Why headline tax rates are just the tip of the iceberg

By Monica Cohen Dumani, EMEA International Tax Services Leader, Partner, PwC Switzerland

What are entrepreneurial and private businesses looking for in the tax and regulatory regime of the country where they’re based? If you think it’s just low tax rates, think again. The real answer is much broader and more nuanced. And if a jurisdiction fails to provide a conducive tax and regulatory environment, this can severely undermine its attractiveness as a place to set up and grow a private business.

All of this shines through in the findings from PwC’s inaugural EMEA Private Business Heatmap. In my view, a drill-down into the scoring in the tax & regulatory environment category reveals some especially significant insights both for private businesses and governments.

Bigger is not necessarily better

What kind of insights? As my colleague Peter Englisch pointed out in his blog introducing the Heatmap, country size is not everything when it comes to fostering entrepreneurialism – and the attractiveness of countries’ private business environments tends to correlate to their GDP per capita. Hence the relatively high proportion of smaller countries in the upper reaches of the ranking for overall attractiveness. But if we zoom in on some of the specific scores, things get even more interesting.

Some highly industrialised countries do not score well across all the metrics which is not a criticism but rather, it signals a huge untapped potential to boost a country’s attractiveness to private businesses and unleash entrepreneurial spirit by addressing these areas – which have little to do with its tax rates.

What private businesses want

As well as highlighting what private businesses don’t like in a tax and regulatory regime, our Heatmap also shows what they do want. And this boils down to three things. First, certainty over the rules and how they’re applied. Second, ease of administration in complying with those rules. And third, a “reasonable” level of tax. Clearly, what’s seen as reasonable can vary between jurisdictions, companies and even individuals. As the world moves towards a 15% minimum corporate tax rate, a rate of – say – 40% probably wouldn’t fit this definition.

Also, national tax and regulatory regimes can have a disproportionate impact on private businesses, particularly smaller ones. If compliance is complex and difficult, the resulting administrative burden can have a material impact on their bottom line. To help, government authorities should look to digitise their operations to boost speed and efficiency – while always bearing in mind the need to help businesses digitise too.

Clearly, primary responsibility for improving the tax and regulatory environment sits with the government itself. But if private businesses are unhappy with it, they should make their voice heard through trade associations. This is especially important because regulators invariably add new rules without removing old ones. In the EU, for example, we’re seeing the introduction of the Carbon Border Adjustment Mechanism and the Green Deal bringing about 2,500 new taxes. It’s vital that these positive moves to tackle climate change don’t end up undermining the productivity and dynamism of private businesses.

The message for governments

What’s the big takeaway for governments? In my view, the Heatmap findings strongly reinforce the need for them to apply the right mindset when creating their tax and regulatory environment – ensuring it’s easy for private companies to comply and do business, with reasonable direct and indirect tax rates, properly enforced. All of this will provide private companies with a solid basis for competitiveness and growth.

What’s more, it’s vital not to regard such an environment as giving a “bonus” to wealthy individual and family owners. Through their businesses they’re contributing to their country’s welfare, employment and prosperity – as proven by the close correlation between the Heatmap scoring and per capita GDP. So, creating an attractive tax and regulatory regime for private businesses actually represents an investment in the country’s future wellbeing and growth.

If you’d like to discuss any of the insights in this blog, please get in touch – we’d love to hear from you.

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Monica Cohen-Dumani

Monica Cohen-Dumani

Partner, International Tax Services, EMEA ITS Leader, PwC Switzerland

Tel: +41 58 792 97 18